Annuities are one tool commonly used by retirees and those approaching retirement. While annuities offer a number of specific benefits, they are often viewed with skepticism. They may seem confusing or overly complex. You may feel they pose risks or that they may not fit your situation.
If you’re preparing for retirement, you are likely familiar with the broad range of tools that can be used to accumulate assets, manage income and provide a sound financial foundation. From IRAs to 401(k) plans to long-term care insurance and more, there are many financial strategies at your fingertips.
Before you rule out an annuity, though, you may want to learn more. Annuities can be helpful with a number of retirement challenges, such as minimizing taxes and providing income. Below are some basic questions and answers on annuities to help you get acquainted with the idea:
What is an annuity & how are they used?
An annuity is an insurance-based product that’s used to generate income, either immediately or at some point in the future. You contribute money into the annuity policy via premiums. Many annuities are funded with single, lump-sum premiums, but others may allow you to make additional premiums later.
Then, when you’re ready, you can take income from the annuity. The income amount is based on the unique terms of your policy. In some cases, the income may be based on an interest rate or market returns. In other policies, the income amount is guaranteed for life.
While annuities can be very helpful as income tools in retirement, there are important points to consider before moving forward. Many annuities have what’s called a surrender period. This is a period of time in which you may have to pay a penalty if you surrender your policy or take a sizable withdrawal. For this reason, you may not want to consider an annuity if you don’t have other sources of liquid funds.
Are there different types of annuities? If so, which type is best for me?
There are a few different types of annuities, each serving its own specific purpose. An immediate annuity is one in which the premium is immediately converted into a stream of income. In that example, you contribute money to a policy and the insurance company then calculates an income payment based on the premium, your life expectancy and other factors. You then receive the income for the specified period, which could be the rest of your life.
There are also deferred annuities, in which your premium grows for a period of time before it’s converted into income. In variable annuities*, the growth is tied to investment performance. In fixed annuities, you receive interest and don’t have market exposure. Indexed annuities blend the two, with interest paid based on market returns.
There are many different types of annuities to choose from. Do your due diligence before selecting a policy. A financial professional can help you evaluate your options.
How can an annuity benefit my overall financial picture?
The benefits of an annuity depend largely on the type of annuity you choose. Tax treatment is one of the most common benefits across most types of annuities. Annuities are considered to be tax-deferred, much like other qualified accounts. That means you don’t pay taxes on growth as long as the funds stay inside the annuity.
Another potential benefit is guaranteed income. Many annuities offer various options that provide lifetime guaranteed income streams. You can use an annuity to convert a portion of your retirement savings into income that’s guaranteed to last through your retirement.
Ready to learn more about whether an annuity is right for you? Let’s talk about it. We can help you analyze your needs and identify the right strategies. Let’s connect soon and start the conversation.
*Investors should consider the investment objectives, risks, charges and expenses of a variable annuity and its underlying investment options. The current prospectus and underlying prospectuses, which are contained in the same document, provide this and other important information. Please contact our Investment Professional or the issuing Company to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
Annuities are insurance products backed by the claims-paying ability of the issuing company; they are not FDIC insured; are not obligations or deposits of, and are not guaranteed or underwritten by any bank, savings and loan or credit union or its affiliates; are unrelated to and not a condition of the provision or term of any banking service or activity
Guaranteed lifetime income available through annuitization or the purchase of an optional lifetime income rider, a benefit for which an annual premium is charged. Annuities are long-term, tax-deferred vehicles designed for retirement and contain some limitations.
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